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Fortnightly 40 Best Energy Companies

Superior asset management, exceptional cost discipline, and magnificent growth opportunities define the winners of our second annual financial ranking.

Fortnightly Magazine - September 2006

as stated earlier, not everyone is enamored with paying the dividend. William Michael Warren Jr., chairman of the board and CEO at Energen, has a much different view. He likes everything about the F40 except the dividend metric.

“Of the list of six that you’ve given, profitability is a focal point for us. Of your six metrics, five of those six I really pay attention to,” he says.

However, “the dividend yield is totally meaningless to me, and … near meaningless to an MDU Resources or Questar. It should be to any of the companies that have significant non-regulated assets,” he says.

Some analysts believe the dividend is the great equalizer between super growth E&P companies on the F40 and regulated and diversified utilities with lower growth levels. Other analysts believe Energen’s view of the dividend may prevail in the end, as more and more utilities earn more from their unregulated operations.

In fact, Energen started as a sleepy Alabama LDC and turned itself in to an E&P powerhouse.

“Ten years ago, 80 percent of our company earnings came from Alabama gas, the utility. Twenty percent came from our diversified—primarily oil and gas—exploration and production business. Today, it is the exact opposite of that,” Warren says.

Warren notes the transformation began to occur eight to 10 years ago, when several utilities became somewhat discouraged with the slow pace of utility growth and began exploring ways to diversify away from the regulated utility into related energy businesses to which they could transfer corporate skills. Many of this year’s F40 companies diversified and found new opportunities in unregulated businesses.

But even as many of these chiefs of diversified companies are happy managing unregulated energy businesses, they have no intentions of leaving their regulated utility roots.

“For us, the utility is a foundational business,” Warren says. “Overall, one of the things the utility has done is that it has kept us in touch with the fundamentals of the natural-gas market. On one side of your business you are interfacing with industrial, commercial, and residential customers. You know a lot about supply and demand from that side. And that knowledge is helpful as we think about the future on the oil and gas side as well.”

Edison International’s Bryson likes the hybrid model, echoing Warren’s view on the gas side. “We like that. We think it is a considerable strength that we encompass in the company—strong regulated and strong competitive business lines in electricity. That gives us an understanding of the total electricity business and the total electricity market that is deep and valuable.”

The King of Energy

Some may be surprised that one company has held the top spot on the F40 for two years in a row. But a close look at Kinder Morgan shows a company aggressive (some say driven) in rooting out all forms of inefficient allocation of resources.

Kinder Morgan’s Shaper, in explaining his company’s ethos, makes it sound like a motto: “We are not interested in spending any money that does not further our effort to increase cash flows out